It has been quiet in markets lately—so quiet that one measure of traders’ expectations for stock volatility recently touched its lowest level in more than a year.
The Cboe Volatility Index (.VIX), or VIX, finished Wednesday at 11.75. That was just a hair above where it ended Tuesday, which was its lowest closing level since Aug. 9, 2018, according to Dow Jones Market Data.
The VIX, which is based on options on the S&P 500 (.SPX), tends to rise when stocks are falling and decline as markets rise. While it is an imperfect predictor of future stock volatility, some analysts have found reason to worry about the VIX’s recent decline, questioning whether it points to excessive complacency among investors.
They are thinking in part of what happened last year. Hedge funds and other speculative investors piled into the “short vol” trade over the summer of 2018, betting the VIX would drop further. The stock market’s calm came to an abrupt end in the final months of the year, sending the VIX soaring.
This year, traders are once again betting on more calm ahead for markets: The number of net short speculative positions on futures linked to the VIX has risen after hitting a record of more than 200,000 contracts earlier in November, according to Capital Economics. That is worrisome partly because large and popular bets on anything—such as Treasury yields falling, technology stocks rising or the VIX retreating—often have proved vulnerable to rapid, punishing reversals.
“The developments over the past weeks might support the usual narrative that investors are being complacent, and the idea that we could be in for another equity selloff,” said Hubert de Barochez, markets economist at Capital Economics, in a research note.
Mr. Barochez doesn’t see a sharp pullback ahead for stocks, though.
This time of year is typically a quiet one for markets, he said. The VIX often trades at lower levels during the period between Thanksgiving and New Year’s Eve than it does during the rest of the year. Further, “expected volatility tends to be influenced by actual volatility, so the fact that the VIX is low mainly tells us that actual volatility in the U.S. stock market has been subdued recently,” he said.
Could there still be a jump in the VIX? Yes. But Mr. Barochez, who doesn’t believe there will be a sharp rise in tensions between the U.S. and China or a disappointing policy move by the Federal Reserve, isn’t seeing big catalysts for stock selloffs just yet.
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